India Private Equity Report 2015 Arpan Sheth, the Main Author of This Report, Is a Partner with Bain & Company in Mumbai and Leads the India PE Practice

India Private Equity Report 2015 Arpan Sheth, the main author of this report, is a partner with Bain & Company in Mumbai and leads the India PE practice. Coauthors include Madhur Singhal, a principal in the Mumbai office; Pankaj Taneja, a manager in the New Delhi office; and Karthik Bhaskaran, a team leader in the New Delhi office. All are members of the Private Equity practice in India.

This work is based on secondary market research, analysis of financial information available or provided to Bain & Company and a range of interviews with industry participants. Bain & Company has not independently verified any such information provided or available to Bain and makes no representation or warranty, express or implied, that such information is accurate or complete. Projected market and financial information, analyses and conclusions contained herein are based on the information described above and on Bain & Company’s judgement, and should not be construed as definitive forecasts or guarantees of future performance or results. The information and analysis herein do not constitute advice of any kind and are not intended to be used for investment purposes, and neither Bain & Company nor any of its subsidiaries or their respective officers, directors, shareholders, employees or agents accept any responsibility or liability with respect to the use of or reliance on any information or analysis contained in this document. This work is a copy- right of Bain & Company and may not be published, transmitted, broadcast, copied, reproduced or reprinted in whole or in part without the explicit written permission of Bain & Company.

Contents

About this report ...... 2

Executive summary...... 3

1. Global economic trends: Slow but stable growth...... 9

2. Overview of India’s PE landscape: On the recovery path ...... 15

a. Fund-raising ...... 21

b. Deal making ...... 27

c. Portfolio management with exits ...... 35

3. A focus on investments in consumer technology ...... 43

4. Implications ...... 53 India Private Equity Report 2015 | Bain & Company, Inc.

About this report

Bain & Company provides strategic guidance and advice to stakeholders across India’s private equity (PE) landscape, including general partners (GPs), limited partners (LPs), corporates, entrepreneurs and regulators. Bain has played a key role in developing India’s PE industry over the past decade. Over the past six years, we have drawn upon this experience for our PE reports, which outline the latest developments and trends in the industry and highlight particular sectors. Once again, we are pleased to collaborate with the Indian Private Equity and Venture Capital Association (IVCA) in bringing you our latest edition.

Our India Private Equity Report 2015 contains in-depth analysis of India’s PE landscape, a close look at the currently booming consumer technology sector and our perspectives on the industry’s future. Our conclusions were informed by interviews with stakeholders such as GPs at PE funds, LPs, entrepreneurs and regulators. We also drew from Bain’s proprietary deal and exit databases, and an extensive survey of GPs across various PE funds.

Section 1 presents a broad overview of the changes in the macroeconomic environment and the global PE industry. We touch upon the evolution of India’s business environment and where it stands in relation to competing markets. We also look at the macroeconomic factors that brought about a boom in deal activity in 2014.

In Section 2, we focus on the Indian PE industry and identify the key trends of the past year. Through the lens of the wider political and economic context, we examine the challenges the industry faces and the changing attitudes of industry players. We also provide an overview of each aspect of PE investing: fund-raising, deal making, portfolio management and exits. We look at how the different elements of the investment process have changed in the past year and outline perspectives from industry practitioners for the year ahead. We also look at the investors’ and founders’ points of view on key challenges within the investor-founder relationship, their respective expectations and how best to address the gaps.

In Section 3, we take a comprehensive look at the consumer technology sector, which is attracting significantly more investment than other sectors, and examine the role that PE plays in its fast growth. We also share our perspectives on growth, catalysts, challenges and the investment outlook for this fast-growing sector.

Finally, in Section 4, we step back to assess what these multiple factors mean for the future of PE investment in India. We analyse the current roles that various stakeholders play and make recommendations on how LPs, GPs, entrepreneurs, promoters and policy makers can work together to create a thriving investment climate for PE to perform to its full potential.

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Executive summary

Overview of the current conditions

The global economy moved back on a path towards slow but stable growth in 2014, as evidenced by a 2.4% increase in global GDP. US GDP growth increased slightly, to 2.3%, driven in part by lower oil prices which spurred overall increased consumption; a number of other factors, including higher exports and increased non-federal government spending, also contributed to the rise. Europe witnessed signs of recovery, with overall GDP growth of approximately 1%. Here too, declining oil prices led to improved spending. The weakening euro also helped, making exports from countries like Germany more competitive in the world market. In addition, large European economies such as the UK and Germany saw strengthening growth.

In contrast, growth in top emerging economies slowed over the past year. The economies of BRICS (Brazil, Russia, India, China and South Africa) and MINT (Mexico, Indonesia, Nigeria and Turkey) grew at 5.2% and 3.4%, respectively, marking a decrease from 2013 levels of 5.6% and 3.5%. Combined growth for BRICS and MINT fell below 5% in 2014, a departure from the recent 6% annual growth trend which lasted from 2010 to 2013. Within BRICS, all economies but India experienced slower growth than in 2013.

The acute drop in oil prices was a key contributor to economic growth for some and decline for others. The Russian ruble lost ground versus the US dollar, falling nearly 40% in 2014. Brazil was able to reduce subsidies in oil and gas, but its export business was challenged as a result of the declining oil prices, and its economy remained flat. Even South Africa, which benefitted from reduced inflation, suffered from the resulting impact to commodity prices. Meanwhile, the price drop is expected to help the growth of oil-importing nations, including India.

Also in 2014, global buyout value dropped 2%. North America saw an 18% decrease from the prior year, due largely to a spike during 2013 from the Dell and Heinz deals. Meanwhile the Asia-Pacific PE market set a new all-time high at $81 billion, 63% higher than in 2013.

It was a year of rising optimism, expectations and aspirations for India, especially in light of its first single-party majority government in 30 years. The Indian stock market gave phenomenal returns of more than 30% over the year, compared with less than 10% in 2013. Backed by the stronger macroeconomic landscape, PE activity continued to play a pivotal role in the country’s capital needs, accounting for 53% of foreign direct investment inflows. According to CEIC Data, India’s GDP grew by 6.6% from 2013 to 2014, compared with 4.9% from 2012 to 2013. The services sector experienced particularly strong growth, and its contribution to GDP climbed to 51% in 2014. Notably, trade, hotels, transport, communication and related services grew by nearly 11%, leading the sector’s overall growth.

Not surprisingly, PE investments in India saw a robust increase over 2013. Deal value, including real estate, infrastructure and venture capital (VC) deals, increased by 28% to $15.2 billion—inching closer to 2007 peak levels of $17.1 billion. Overall deal volume in India grew by 14%, with early- and growth-stage deals accounting for 80% of total deals in 2014. Deal value also rose as a result of a few megadeals. The consumer technology sector led in both deal value and volume, constituting 31% of overall deal value and 35% of overall deal volume.

Looking at the year ahead, GPs in India expect a further increase in deal activity, propelled by macroeconomic conditions, positive investor sentiment and an improved exit environment. However, GPs remain concerned

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about a mismatch in valuation expectations and the tough competitive environment for good-quality deals. India needs to continue to improve the ease of doing business in the country, a large part of which involves a regulatory environment that is more conducive to business growth to attract investment. With “Make in India” as one of its top agendas, the new government has already taken steps in this direction, including reforms in labour laws and plans to introduce a goods and services tax (GST).

In terms of attracting foreign investments, India continues to face competition from other emerging economies with prospects for strong growth, including South Africa and Nigeria. That said, India boasts strong GDP growth, a vibrant entrepreneurship ecosystem and a positive future outlook, making it one of the most attractive of the emerging economies for PE investments in 2015.

Fund-raising

Funds allocated to Asia-Pacific on a regional level grew by 11% in 2014 to $43 billion, whilst the overall global numbers fell 7% to $375 billion (excluding real estate and infrastructure), a clear testament of LPs’ commitment to the region. In absolute terms, funds focused solely on India amounted to twice that of the prior year. Many PE firms are planning or have announced their next round of fund-raising; these firms include Everstone, Baring and Carlyle. One trend that hasn’t changed is that there continues to be enough capital chasing good deals, especially because a significant amount of capital is also drawn into India via allocations from Asia-Pacific and global funds. In addition to this, several sovereign wealth funds have made large direct investments already—for example, the $376 million PIPE into Kotak Mahindra Bank by Canada Pension Plan Investment Board (CPPIB).

In 2015, PE firms plan to increase their focus on fund-raising, and they cite track record, team expertise and exit success as the most important factors in this regard. Yet, when it comes to raising India-focused funds, PE firms remain challenged by the regulatory environment, macroeconomic uncertainties such as currency and inflation, and the longer gestation period for investments. However, the majority still expect more fruitful fund-raising in 2015 than in past years.

Deal making

Deal volume in India grew by 14%, fuelled predominantly by the consumer technology sector. Deal value rose 28% from the prior year, driven by the consumer technology sector; the banking, financial services and insurance (BFSI) sector; and the real estate sector.

Together, the top 25 deals excluding real estate represented 49% of total investments in 2014, or $6.4 billion, climbing 13% from $5.7 billion in 2013. The $1 billion investment into Flipkart by a series of funds represented the largest of the year’s deals. Investments in early- and growth-stage deals continued to rise in 2014 and accounted for 80% of total deals, up from 71% in 2013. The average size of PE deals, excluding real estate and VC deals, increased from $41 million to $53 million. The majority of GPs we surveyed expect that average deal sizes will continue to rise over the next two to three years. And consumer technology, healthcare and financial services are expected to be the most attractive sectors in the next two years.

GPs perceive that valuations are tempering and becoming more fair; however, given the upward trajectory the Indian economy seems to be embarking on, they expect valuations to rise between 10% and 25% in 2015. Funds feel very positive about their potential to generate returns, and more than 60% expect the median Internal Rate of Return (IRR) to exceed 20% in the next three to five years.

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Given the country’s stable government—along with price declines for oil, strong GDP growth projections and low inflation—GPs are optimistic about the prospects of the Indian PE and VC industry. In fact, more than 50% expect to see growth on the order of 10% to 25% in 2015, and more than 25% across the next one to two years, in terms of investments made.

Portfolio management and exits

The number of reported exits in India grew 14% from 2013 to 2014, though the value of exited investments dropped by 22% to $5.3 billion compared with $6.8 billion in 2013. In 2014, the strong performance of capital markets drove up public market sales. These sales gained importance over the year, accounting for six of the top ten exits. Funds expect a further increase in the significance of IPOs, strategic sales and secondary sales. In contrast, they expect promoter buybacks to decline. Some funds have a short life, making other options infeasible.

India is going through significant exit overhang, and the pressure to exit is expected to rise. Funds continue to face challenges with pre-2008–vintage unexited deals; yet, the situation is improving compared with the past two to three years. If viable exits don’t occur in the next two to three years, one could expect to see a shakeout in the industry as fund tenures come to expiry. In the meantime, PE funds aim to focus increasingly on developing and implementing value creation plans with portfolio companies to ensure that exit stories are tight and lucrative.

Sector in focus: Consumer technology

The consumer technology sector encompasses multiple segments. E-commerce—which includes e-tailers Flipkart and Snapdeal, online travel companies, as well as taxi and other providers who channel services via mobile phone and Internet—accounted for a significant chunk of investments in the sector in 2014. Social connectivity services represented the second-largest segment. Becoming increasingly popular on a daily basis, Facebook, Twitter, LinkedIn and similar services, along with online classifieds, all fall into this bucket. Content-generating and -sharing companies, including entertainment and data-generating companies, are also a part of the consumer technology sector. The new but fast-growing wearable technology segment, which includes smart access devices and fitness devices, also falls in the consumer technology sector. The last portion comprises the enablers, which aid the functioning of a part (or parts) of the operating model for other companies in this space; examples include providers of payment media, e/m-advertisers, application developers, analytics services and logistics and delivery services.

As far as the Indian market is concerned, 2014 has been a very good year for the consumer technology sector. The continued rise of Internet penetration was a key factor in the sector’s growth, and e-commerce has experienced tremendous growth. From booking a taxi to buying groceries to purchasing furniture, Indians are rapidly turning to mobile phones and computers for their transactions. With mobile Internet driving a significant portion of the Internet penetration, application development is also witnessing high growth. As mobile companies continue to focus on mobile Internet, and as logistics and payment services become even more robust, this sector is well poised for further growth.

The belief in the sector’s growth potential was reflected in investments: Consumer technology was the largest sector in terms of PE and VC investments in 2014, contributing approximately 31% to overall deal value and accounting for approximately 35% of overall deal volume. Investments in the sector almost quadrupled over the past year, from $1.2 billion to $4.7 billion, and the number of deals grew by 18% to 280. Average deal size bal- looned from $5 million to $17 million; the increase was driven primarily by the top three deals, which accounted for 50% of the total deployed capital in the sector.

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Large consumer technology companies, including Flipkart, Snapdeal and Housing.com, raised multiple rounds of funding and saw a steep surge in valuation. Flipkart, for instance, saw its valuation grow more than fivefold in 2014, from approximately $2 billion in May to $11 billion in December, while Snapdeal’s valuation tripled, rising from about $700 million in February to $2 billion in November. GPs expect consumer technology valuations to remain high.

Some 80% of the PE funds we surveyed said that though current consumer technology sector valuations are high, they are expected to rise further in the next one to two years. Overall, the sector is well set on a high growth trajectory.

Note: Our India Private Equity Report includes deal and exit data across sizes and sectors including real estate and infrastructure, whereas our Asia-Pacific Private Equity Report excludes real estate and infrastructure sectors as well as deals smaller than $10 million; any difference in deal and exit counts or values are driven by the above-stated assumptions unless otherwise stated.

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• The global economy continued its moderate expansion, growing approximately 2.5% in 2014, 1. even as declining oil prices altered the course. • While the emerging economies of BRICS and MINT grew 5% and 3%, respectively, both ex- Global economic perienced a decline in their rate of growth. In contrast, developed economies picked up the trends: Slow but pace, growing by slightly more than 1.5%. stable growth • Global buyout activity was mostly flat compared with 2013, with value declining 2% and volume growing 2%. Asia-Pacific showed strong growth.

• Investment deal value rose 63% in Asia-Pacific* as each country in the region, except Japan, saw an increase. Spurred by a number of $1 billion- plus megadeals, Greater China increased its deal value by 180% over 2013. Korea, ANZ and India followed, with growth rates of 34%, 18% and 10%, respectively.

• India’s PE market (including real estate, infrastructure and deals of less than $10 million) also experienced strong growth in deal value, at 28%—an even stronger indicator of market health.

• The Indian macroeconomic environment received a big boost, riding the wave of a new government at the helm. GDP grew 6.6% in 2014, while inflationary pressures reached lows of 5%.

• Improved global macroeconomic conditions, coupled with growing investor confidence in India, led the Foreign Direct Investment (FDI) inflow to reach nearly $29 billion, the highest amount in the last five years. PE continued to play a major role, accounting for 53% of the inflow.

• With the new government working towards improving the country’s business environment, the future outlook for India is strongly positive.

*Excluding real estate, infrastructure and <$10M deals India Private Equity Report 2015 | Bain & Company, Inc.

Figure 1.1: Global economy remained stable in 2014, growth slowed for BRICS and MINT compared with previous years; however, BRICS continued to propel global growth

Global real GDP CAGR CAGR (10–13) (13–14) $60T 58 2.3% 2.4% 56 57 53 55 2.7% 2.8% 4.4% 3.4% 6.0% 5.2% 40

20 1.3% 1.7%

0 2010 2011 2012 2013 2014 Year-over- 4.0% 2.5% 2.2% 2.3% 2.4% year growth Advanced countries BRICSMINTOthers

Notes: GDP adjusted for inflation and represented at constant 2005 USD prices; “advanced countries” refers to 34 countries classified as “advanced economies” by the IMF; BRICS refers to Brazil, Russia, India, China and South Africa; MINT refers to Mexico, Indonesia, Nigeria and Turkey Source: Economist Intelligence Unit (estimates)

Figure 1.2: Global buyout activity has been remarkably flat since the latest expansion cycle began in 2010; Asia-Pacific showed strong growth at 35% in 2014

Global buyout deal value Deal count

$800B 3,000

687 673

600

2,000 CAGR (13–14) Total deal value –2% 400 ROW44% 293 247 256 252 1,000 Asia-Pacific 35% 204 203 189 199 200 Europe 12% 134 111 98 109 North America –18% 77 53 65 68 31 31 Deal count 2% 0 0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Notes: Excludes add-ons, loan-to-own transactions and acquisitions of bankrupt assets; based on announcement date; includes announced deals that are completed or pending, with data subject to change; geography based on the location of targets; ROW stands for rest of the world Sources: Dealogic; Bain Global PE Report 2015

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Figure 1.3: Looking at the Asia-Pacific PE market, investment deal value increased across the region; Japan is the exception

Asia-Pacific investment deal value increased by approximately 63% in 2014India posted a 10% increase over 2013

Asia-Pacific investment deal value CAGR (13–14) investment deal value

$100B 200% 182 Exceptionally high growth rate for GC driven 81 by the top four deals: A.S. Watson ($5.7B), Sinopec ($5.0B), China Huarong ($2.4B) and 80 SEA 150 GLP China ($2.4B). In addition, 2013 saw 67 63% KOR lowest investments in GC in past seven years. JAP 60 56 58 100 50 50 IND

40 37 50 34 Asia-Pacific 18 GC 10 6 20 0 –7

ANZ 0 -50 2008 2009 2010 2011 2012 2013 2014 Greater Korea ANZ India* Southeast Japan China Asia *For Indian PE market, when including real estate, infrastructure and deals of more than $10 million, the value growth for 2014 over 2013 comes out to 28% Notes: Analysis based on deals less than $10 million value; excludes real estate and infrastructure; ANZ stands for Australia and New Zealand Source: Asia Venture Capital Journal

Figure 1.4: Indian macro environment strengthened in 2014, growing at 6.6% over 2013; services sector grew fastest and now contributes more than 50% to GDP

India real GDP Electricity, gas, water supply CAGR CAGR Mining and quarrying (12–13) (13–14) Contribution to GDPCAGR INR100T Public administration, defence 4.9% 6.6% and other services 92 2.3% 2.9% 2012 2014 CY 2012–14 86 0.5% 5.5% 82 Construction –4.4% 2.5% 80

Manufacturing 6.1% 5.3% Industry*19% 18%2.8%

60 4.7% 8.0%

Trade, hotels, transport, 9.2% 10.9% 40 Services** 48%51% 8.5% communication Financial, insurance, real estate and 9.0% 8.0% 20 professional services

Agriculture, forestry 1.7% 3.8% Agriculture33% 31%3.3% and fishing 0 2012 2013 2014

*Industry includes manufacturing, construction, mining and quarrying, electricity, gas, water supply and other utility services **Services includes trade, hotels, transport, communication, financial, insurance, real estate and professional services, and public administration, defence and other services Note: GDP represented at constant 2011–12 prices Source: CEIC Data

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Figure 1.5: Indian stock market yielded about 30% returns after general elections in 2014, among the highest in emerging economies, second only to China

Stock market indices 1.5 China

1.4

1.3 India

1.2 Indonesia

1.1 South Africa 1.0 Brazil Russia

0.9

0.8 January March June September December 2014 2014 India general election 2014 2014 2014 results–May 2014

Notes: Stock market indices adjusted to common base at start of 2013; indices used are China-Shanghai Stock Exchange Composite, Indonesia-Jakarta Stock Exchange Composite, India-S&P BSE SENSEX, Russia-MICEX, South Africa-FTSE/JSE, Africa Top 40 Tradable, Ibovespa Brazil São Paulo Stock Exchange Sources: Bloomberg; CEIC Data; Bain India PE deals database

Figure 1.6: The tide also turned post-elections for other economic indicators; inflationary pressures eased substantially during 2014

India’s wholesale and consumer price indices year-over-year growth rates

13%

5 CPI

WPI 0 December June December June December June 2014 2011 2012 2012 2013 2013 India general election results–May 2014 Source: CEIC Data

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Figure 1.7: Crude oil prices fell by about 50% during the last five months of 2014

Crude oil prices (USD per barrel) India, compared with other emerging economies, 120 will significantly benefit from the fall in oil prices India 110 • India imports the majority of its oil; lower oil import bill will help reduce the country’s current account deficit. 100 49% • With oil companies making larger profits due to lower costs, government will be able to cut subsidies, facilitating investments in other areas. 90 • Cheaper energy is likely to moderate already falling inflation; this should lead to lower 80 interest rates and more spending power, thereby boosting investment.

70 Russia • Oil and gas accounts for about 70% of the export income for Russia. The Russian 60 economy is expected to shrink in 2015 if oil prices don’t recover. 50 Brazil • While Brazil will be able to reduce subsidies in 0 oil and gas, its export business will be January April July October December challenged by falling prices; falling iron ore 2014 2014 2014 2014 2014 prices are also likely to hurt Brazil. Sources: Bloomberg; Guardian; Economic Times; Business Standard; BBC

Figure 1.8: Global macroeconomic conditions, combined with growing investor confidence, led to increased FDI in India in 2014

Total FDI increased by about 30% in 2014; PE continued … Propelling deal activity, with number of deals increasing to account for majority of FDI at 53% ... at 20% CAGR in last four years

Total FDI inflow into India Number of PE and VC deals in India 30 $29B 1,000 $28B

795 $23B 800 $22B 20% $21B 696 20 600 531 551 No- n PE 400 380 10

200 PE

0 0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014

% PE 44% 54% 45% 54% 53%

Notes: PE as percent of FDI calculated by dividing total deal value in the respective year by the total FDI inflow; FDI refers to an investment made by a company or entity based in one country into a company or entity based in another country. FDI differs from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Sources: CEIC; Bain India PE deals database

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• Indian PE and VC deal value, including deals across sizes and sectors, increased 28% to $15.2 billion in 2014, the highest in the past five years. 2. Meanwhile, deal volume rose by 14% over 2013.

• The number of funds investing in India grew at a Overview of phenomenal rate, rising nearly 30% over 2013. Of the approximately 440 funds that invested, India’s PE close to 50% were doing so for the first time in the landscape: past three years. On the recovery • The share of early- and growth-stage deals continued to rise as both PEs and VCs looked to path invest via these routes.

• Deal activity is expected to surge, and GPs point to a strong macroeconomic environment, changes in the exit environment and evolving investor sentiment as the top drivers.

• Rising competition and a mismatch in valuation expectations are the likely near-term challenges in the PE space. India Private Equity Report 2015 | Bain & Company, Inc.

Figure 2.1: Total PE deal value in 2014 grew 28% to $15.2 billion, inching closer to 2007 peak levels; number of deals grew by 14% to 795

Annual PE and VC investment in India Top deals in 2014 $20B Company Fund(s)Value ($M) Naspers, Tiger Global Mgmt, Accel Partners, 17.1 Flipkart1Morgan Stanley Investment Mgmt, DST Advisors, ,000 15.2 GIC, Sofina, Iconiq Capital 14.8 15 14.1 28% Qatar Investment Authority, DST Advisors, Greenoaks Flipkart Ventures, GIC, Iconiq Capital, Tiger Global, Stead- 700 11.8 view Capital, T. Rowe Price, Baillie Gifford & Co. 10.2 9.5 BlackRock, Tybourne Capital Mgmt., Temasek, Soft- 10 Snapdeal.com 636 Bank, PI Opportunities Fund I, Myriad Asset Mgmt. 7.4 Unitech Corporate Brookfield 581 Parks 5 4.5 Kotak Mahindra Canada Pension Plan 376 Bank Investment Board (CPPIB) 2.6 Shriram Capital Piramal Enterprises 334

0 CDPQ, CPPIB, State General L&T IDPL 323 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Reserve Fund (SGRF) Number 14% Jaiprakash of IDFC Private Equity, PSP Investments 316 deals 185 296 494 448 216 380 531 551 696 795 Power Ventures Sutherland TPG Capital 300 Global Services Minacs CX Partners, others 260 Note: Includes all deals, including real estate, infrastructure and small deals Source: Bain India PE deals database Total 4,826

Figure 2.2: Number of active funds grew by about 30% in 2014, led by about 220 new funds investing in India

Active PE and VC firms conducting deals in Indian market Top deals in 2014 involving funds investing for the first time* in India

500 Deal size Fund(s) Investment ($M) 436 DST Advisors Flipkart 1,000 29% 400 DST Advisors, Qatar IA, Greenoaks Ventures, Steadview Flipkart 700 338 Capital, Baillie Gifford & Co. New Tybourne Capital, Myriad Snapdeal.com 300 287 Asset Management 636 Unitech Corporate Brookfield 581 233 Parks Piramal Enterprises Shriram Capital 334 200 CDPQ, SGRF L&T IDPL 323 Jaiprakash PSP Investments 316 Power Ventures Existing 100 Steadview Capital Olacabs 210

DST Advisors Flipkart 210

Saama Capital Snapdeal.com 134 0 2011 2012 2013 2014 *Only new funds investing for the first time in India in last two years and participating in the deal are listed Note: A fund is classified as new if it has not done any deal in the preceding two years, i.e., new funds include funds that did a deal in the current year but were inactive last year Source: Bain India PE deals database

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Figure 2.3: Funds consider post-deal involvement, portfolio team’s strength and strong industry dynamics to be key factors for investment success

Which of the following do you find most critical for an investment to be a success? % of total respondents selecting the factor as one of the key influencers 60%

0 Extensive Strength of the Strong Robust Clear value Positive Exclusive Early exit Creative involvement portfolio industry commercial creation plan external access to strategy and ways to lock post-acquisition management dynamics due diligence and strategy factors and the deal divestment process in "activist- team and growth (post-acquisition) macro and target type deals" environment Source: Bain-IVCA Private Equity Survey 2015 (n=39)

Figure 2.4: Macroeconomic conditions, exit environment and investor sentiment are expected to remain the top three growth influencers in 2015

What, according to you, were the key drivers of growth in deal activity (number and value of deals) in 2014? What do you think will drive growth in 2015?

% of total respondents selecting the factor as one of the key influencers

100%

0 Macro- Changes Evolution in Modification Number of Changes in Ability to Evolution in Change in economic in exit investor in regulation attractive deal valuation generate competitive companies’ conditions environment and LP opportunities expectations value from intensity in corporate sentiment portfolio the market governance companies 2014 2015 Source: Bain-IVCA Private Equity Survey 2015 (n=39)

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Figure 2.5: However, the biggest challenges are expected to be mismatched valuation expectations and tough competitive environment

In your view, what have been the biggest challenges and barriers to growth of the Indian PE and VC industry over the last two years? How do you expect these to change? 80%

0 Volatile political Regulatory Difficulty in Inability Mismatch in Corporate Finding Limited access to Tough and macro- changes fund-raising to exit valuation governance attractive deal other sources competitive economic factors expectations opportunities of capital environment

Last two years Next two years Top challenges in next two years

“2015 is going to be tough as valuations are very high, and “Competition has increased, especially for sectors like from a PE point of view, returns might be questionable as consumer technology, as a lot of hedge funds, etc. are compared with the value of the investment made.” also trying to invest in the sector.” —Fund manager —Fund manager

Source: Bain-IVCA Private Equity Survey 2015 (n=39)

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• Asia-Pacific–focused capital increased in 2014. Specifically, the value from India-focused funds more than doubled compared with 2013. Further 2a. increases are expected in 2015.

• India’s dry powder from India-focused funds Fund-raising dropped to $8 billion due to the significant deploy- ment of investments in 2014.

• 70% of the GPs surveyed believe that fund-raising is likely to become easier in 2015, despite the regulatory challenges and macroeconomic uncertainties which were cited as the most common challenges in this area. Indian investments need to build further credibility via successful exits.

• Survey respondents pointed to track record and team expertise as the most critical factors for PE fund allocation decisions. As a result, GPs continue to focus on building strong teams. India Private Equity Report 2015 | Bain & Company, Inc.

Figure 2.6: Fund-raising in Asia-Pacific increased by 11% in 2014; India-focused funds grew by more than 110%

Value of final closed size of Asia-Pacific–focused funds (by country and year of final close)* CAGR (13–14) 11% $60B 55 52 Korea −8% SEA −39% 43 43 43 40 39 Japan −46% 37 ANZ 240% 35 India 116%116%

GC −15%

22 21 20

APAC 33%

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

*Excludes real estate and infrastructure Notes: GC is Greater China; APAC is Asia-Pacific; ANZ is Australia and New Zealand; SEA is Southeast Asia Source: Preqin

Figure 2.7: India-focused dry powder shrank to $8 billion due to reduction in focused fund-raising, but good-quality deals are not lacking capital

Dry powder from India-focused funds* Capital for India $12B 11.7 also comes from regional 10.7 allocations by 10.3 10.4 global and 10 9.4 Asia-Pacific–level 9.0 funds

8.0 8.0 8

0 2007 2008 2009 2010 2011 2012 2013 2014

*Excludes real estate and infrastructure funds As of December Source: Preqin

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Figure 2.8: Fund-raising activity for India is expected to increase further in 2015; many funds are looking to raise next round of funding in the coming year

What were the most important goals in When do you expect your firm to come 2014? What will be the most important to market to raise your next fund Many funds are already looking to raise capital goals of your fund in 2015? targeting Asia-Pacific?

“The Singapore-based fund manager (Everstone) 100% Others 100% We are not planning is targeting $650 million to invest in companies to raise a new fund that have significant operations in the Indian Fund-raising subcontinent. The new, third fund, Everstone In more than 24 Capital Partners III LP, will have a $700 million months hard cap.” 75 75 —International Finance Corporation (October 2014) Exiting current In 12−24 months investments “Baring Private Equity Asia (Baring Asia), which has lately become quite active in India, has 50 50 Working with raised $3.98 billion in its new flagship fund, existing portfolio taking its total assets under management to companies around $9 billion.” (portfolio —VCCircle activism) Within 12 months (February 2015) 25 25 “Carlyle Group, one of the world's largest private Making new equity firms, has closed its fourth Asia fund at deals $3.9 billion, the second-largest private equity fund ever raised for Asia investments.” 0 0 —Reuters 2014 2015 Fund-raising timeline (September 2014) Sources: Bain-IVCA Private Equity Survey 2015 (n=39); Reuters; VCCircle; WSJ

Figure 2.9: Foreign investments have been the primary source of capital for most funds and are expected to grow further in the next two years

Within domestic sources, Indian institutional investors FDI and FII have been primary sources of capital for most funds have been the key source of capital

100% 100% GPs of PE firms Domestic investment Indian noninstitutional investors 75 Foreign VC 75 investment

50 50 FDI Indian institutional investors

25 25

FII

0 0 Last two years Expected in next two years Last two yearsExpected in next two years

Notes: FII stands for foreign institutional investment; FDI stands for foreign direct investment Source: Bain-IVCA Private Equity Survey 2015 (n=39)

Page 23 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 2.10: Despite concerns around regulatory environment and uncertainties around currency and inflation, more than 70% of respondents expect fund-raising to become easier

What are your biggest challenges and concerns How do you expect the difficulty in raising when raising India-focused funds? India-focused funds to change in 2015?

Average rating on a scale of 5, where 5=very challenging; 1= less challenging Get significantly more challenging 5 100% Get somewhat more challenging

3.9 Remain the same 4 80 3.7 3.6 3.5 3.3

3 60

2 Get somewhat better 40

1 20

0 Prior Regulatory Macroeconomic Longer gestation Limited GP and Get significantly better experiences environment uncertainties period for investing team 0 (currency, inflation) investments track record Difficulty in raising India-focused funds

“Fund-raising for India-focused funds is still not easy. India has still not returned capital and has yet to prove itself as an asset class.”—PE fund manager, India

Source: Bain-IVCA Private Equity Survey 2015 (n=39)

Figure 2.11:Funds consider their track record, team and exit record to be the most important factors for successful fund-raising

Please rate the importance of the following factors for successful fund-raising Average rating on a scale of 5, where 5=very important; 1=not so important 5 4.5 4.3 4.1 4 3.6 3.6 3.3 2.9 3 2.7

0 Track record of the Team (quality, Exit Ability to add Sector Constant Co-investment Flexible fee GP (quality of attrition, record value to specialisation engagement of options and investments made) experience) portfolio and LPs (before and for LPs investment companies expertise after the fund- terms Source: Bain-IVCA Private Equity Survey 2015 (n=39) raising process)

Page 24 India Private Equity Report 2015 | Bain & Company, Inc.

Page 25

• Deal activity was robust in 2014 as deal value and volume grew at approximately 28% and 14%, respectively. Consumer technology, real estate 2b. and BFSI were the key drivers of the increase in total deal value.

Deal making • The average deal size of PE investments rose by 28% over 2013, reaching $53 million in 2014. Moreover, nearly 50% of survey respondents expect this trend to continue.

• With an increase in the number of deals over $100 million, the top 25* deals accounted for $6.4 billion of the capital deployed, constituting 49% of the total PE deal activity in 2014.

• Minority stake deals accounted for more than 90% of the total deals, and this figure is expected to rise as competition for deals intensifies.

• GPs surveyed expect early- and growth-stage deals to continue to account for more than 80% of investments.

• While valuations in 2014 are perceived to be fair, nearly 60% of GPs expect them to increase further in the near future.

• GPs surveyed identified consumer technology, healthcare and financial services as the primary growth sectors for the next two years.

• Looking ahead, GPs are optimistic about return expectations, even as horizons of investments are likely to remain stable.

*Excluding real estate deals India Private Equity Report 2015 | Bain & Company, Inc.

Figure 2.12: Total deal value in 2014 surged to $15.2 billion, with highest investments in consumer technology, real estate and BFSI

Annual PE and VC investments in India by sector Engineering and CAGR CAGR CAGR $16B construction Sector 15.2 10–13 13–14 10–14 14.8 Others Others 14% –56% –10%

11.8 Energy Engineering 12 Consumer and –23% 90% –3% & retail construction 10.2 Healthcare 9.2 IT & ITES Energy –31% 35% –18%

8 BFSI Consumer 61% 92% 68% & retail

Real estate Healthcare 33% –23% 16%

IT & ITES 50% –17% 29% 4 BFSI 0% 55% 12% Consumer technology Real estate –1% 60% 11%

Consumer 0 101% 287% 137% 2010 2011 2012 2013 2014 technology Number 338 531 551 696 795 Total 9% 28% 13% of deals Notes: Others includes hotels and resorts, retail, shipping and logistics, textiles, education, telecom, media and entertainment, manufacturing and other services; BFSI refers to banking, financial services and insurance Source: Bain India PE deals database

Figure 2.13: Funds expect that consumer technology, healthcare and financial services will see maximum investment activity

Which sectors are expected to be attractive for PE and VC investments over the next two years? Average rating on a scale of 5, where 1=very unattractive; 5=very attractive 5 4.5 4.3 4.3 4.2 4.2 4 4.0 3.9 3.7 3.6 3.6 3.2 3 2.9

2.4 2.3 2

0 Consumer Health- Financial Consumer Tech- Distribution, Services Industrial Education Media Infrastructure, Telecom Real Energy and technology care services products nology logistics and goods and utilities estate oil and gas and retail and IT airlines manufacturing and energy “In India, financial services has been one of the most attractive sectors, even more than IT, and it has some new emerging interesting themes. E-commerce is another one, though currently more VCs are present as compared with PEs.” —India PE fund manager Source: Bain-IVCA Private Equity Survey 2015 (n=39)

Page 28 India Private Equity Report 2015 | Bain & Company, Inc. 2.14

Figure 2.14: Top 25 deals comprised 49% of total investments in 2014

Top 25 deals contributed $6.4 billion, an increase of 13% over last year Increase in deals with ticket sizes of more than $100 million

Total size of top 25 deals* % of total deals* >$100M $8B 100% $50–$100M >$500M $25–$50M 13% 6.4 6 5.7 75 $300–$500M 5.0

4.2 4 3.7 $200–$300M 50 <$25M

25 $100–$200M

0 2010 2011** 2012 2013 2014

% of 0 total 53% 44% 44% 55% 49% 2013 2014 2013 2014 Total number *Excludes real estate deals **Includes 26 deals, as deals ranked 23 to 26 are of the same size equalling $100 million of deals 643 730 19 23 Source: Bain India PE deals database

Figure 2.15: Average deal size increased by 28% in 2014; majority of respondents expect it to increase further in the next three years

The average deal size increased from $41 million to $53 million for PE deals ...... With further increase expected in the coming years

Average deal size How do you expect average deal size for your fund to change over the next two to three years, compared with 2014? $60M Decrease significantly (>25%) 53 % of total responses Decrease slightly (10–25%) 28% 100%

41 40 80 Relatively stable (±10%)

19 20 17 40 Increase slightly (10–25%)

20 2013 2014

Increase significantly (>25%) 0 0 Overall average deal size PE average Change in average deal size in next 2–3 years (PE, VC and real estate) deal size Notes: PE deals exclude VC and real estate deals; VC deals defined as early- and growth-stage deals with value less than $20 million Sources: Bain India PE deals database; Bain-IVCA Private Equity Survey 2015 (n=39)

Page 29 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 2.16: Activity in early- and growth-stage investments increased from 71% in 2013 to 80% in 2014; trend expected to continue

What have been the types of investments made by your fund during the last PE deals by stage two years? How do you expect this to change over the next two years? % of total deal count* % of total responses

Other 100% 100% Secondaries Buyout Buyout PIPE PIPE 80 80

Late

60 60 Growth

Growth 40 40

20 20 Early Early

0 0 2011 2012 2013 2014 Last two years Next two years *Excludes real estate deals Notes: Growth stage includes pre-IPO deals; PIPE stands for private investment in public equity Sources: Bain India PE deals database; Bain-IVCA Private Equity Survey 2015 (n=39)

Figure 2.17: Majority of funds believe competition for deals will increase in 2015; expect competition to be highest from global funds

How did the competition for PE deals change over 2014 for each Identify the category of PE competitors category of competitors? How do you think it will change in 2015? you see as the biggest threat in 2015

% of total responses % of total responses

100% 100% Decrease Strategic players 80 80

No LPs/SWFs 60 60 change (direct investing)

40 40 Domestic funds

Increase 20 20 Global funds

0 0 2014 2015 2014 2015 2014 2015 2014 2015 Biggest threat Biggest threat Global Domestic Direct investing Strategic in 2014* in 2015 PE firms PE firms by LPs/SWFs players “There is increasing competition in large pay-cheque *Data from Bain-IVCA Private Equity Survey 2014 (n=53) minority deals as a lot of sovereigns and LPs are Source: Bain-IVCA Private Equity Survey 2015 (n=39) choosing to go direct.” —India PE fund manager

Page 30 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 2.18: Minority stake deals continue to dominate with more than 90% of the share of total deals; more GPs are inclined to minority stake deals even in the future

What stakes have you taken in companies you have invested in during the Deals by stake last two years? How do you expect this to change over the next two years?

% of total deal count* ≥75% % of total responses 50%–75% 100% 100% >50%

80 25%– 80 50% 25%–50%

60 60

40 40 <25% 10%–25%

20 20

<10% 0 0 2010 2011 2012 2013 2014 Last two yearsNext two years *Excludes real estate deals Note: Includes only those deals where stake size is known Sources: Bain India PE deals database; Bain-IVCA Private Equity Survey 2015 (n=39)

Figure 2.19: Funds believe that valuations are fair and expect them to increase further in future

What has been the average investment horizon of What is your appraisal of current deals you have made during the last two years? How do you expect valuations to change? valuations of potential targets in India? How do you expect this to change over the next two years? % of total responses % of total responses % of total responses

100% 100% 100% Very high >7 years

80 80 80 High Increase slightly (10%–25%) 5–7 years 60 60 60

40 40 40 Fair 3–5 years Remain stable 20 20 20

Attractive Decrease slightly (10%–25%) <3 years 0 0 0 2013* 2014 Expectation on change Last two yearsNext two years in valuations *Data from Bain-IVCA Private Equity Survey 2014 (n=53) Source: Bain-IVCA Private Equity Survey 2015 (n=39)

Page 31 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 2.20: Given strong forecasts for 2015 growth, investment outlook in next one to three years is highly positive with expected increase in growth and investment targets

What is your expectation for growth in the Indian PE and VC industry Approximately how much will your fund aim to invest in the future, compared with 2014 (in terms of investments made)? in India on an annual basis in 2015 and beyond? % of total responses % of total responses

100% Decline 100% $200–$500M No change

$100–$200M

80 Growth of 80 10–25%

60 60 $50–$100M

40 40

Growth >25%

20 20 <$50M

0 0 2014* 2015 Next 1–3 years 2015Next 1 to 3 years

*Data from Bain-IVCA Private Equity Survey 2014 (n=53) Source: Bain-IVCA Private Equity Survey 2015 (n=39)

Page 32 India Private Equity Report 2015 | Bain & Company, Inc.

Page 33

• GPs point out that a larger number of Indian promoters now better understand the PE funding proposition. Valuations, sector expertise and brand 2c. are the most important criteria for entrepreneurs who are looking for PE funding.

Portfolio manage- • Promoters continue to seek PE support for decisions around international financing, expansion ment with exits and customer access. From a promoter point of view, operational freedom and transparency in communication are considered essential to good partnerships with PE funds throughout the deal- making process.

• Funds are also considering expanding their operating teams to unlock higher value in their portfolio companies.

• Exit volume grew by 14% in 2014, even as total reported exit value dropped. Exit volumes are expected to rise sharply in coming years in response to continued pressures to return capital.

• Public-market sales accounted for a sharply growing share of exits as Indian public markets continued to reach new heights. GPs surveyed pointed to IPO and strategic sales as the most attractive exit routes in the near future.

• Even as pre-2008–vintage unexited deals continue to face challenges, the situation has improved from 2013. India Private Equity Report 2015 | Bain & Company, Inc.

Figure 2.21: GPs agree that more entrepreneurs are accepting PE; in addition to valuation, expertise and brand are becoming important when seeking funding

How well do Indian promoters understand the PE funding In your opinion, what is the importance entrepreneurs ascribe proposition compared with two to three years ago? to each of the following criteria while seeking PE funding? % of total responses Average rating on a scale of 5 where 1=least important; 5=very important 100% 5 Very low

80 Fair 4 Low

60 3

2 40 Fair Good

20 1

GoodGood Very good 0 0 2–3 years ago Today ValuationSector expertise Brand Network Track record Referrals and experience of the fund in industry from (past investments) others “We wanted a partner who would give us complete freedom. Good PE with the right characteristics is more important than valuations in the long run. We wanted a PE investor who will help us reach the next level.”—Promoter, PE-funded Indian firm *From Bain-IVCA Private Equity Survey 2015 (n=39) Source: Bain-IVCA Private Equity Survey 2015 (n=39)

Figure 2.22:While corporate governance is top of mind for investors, entrepreneurs seek PE support for international financing decisions, expansion and customer access

Based on your experience with portfolio companies in India, please rate how important it is to help them in the following areas. Also rate how open Indian promoters are in seeking and accepting help in the following areas. Average rating on a scale of 5, where 1=least important/open; 5=extremely important/open 5

0 Corporate Vision Operational 100-day Executive Financing Customer M&A and governance and improvement (post-close) coaching and decisions access international strategy plans hiring decisions and access expansion

Importance of helping portfolio companies Openness of Indian promoters to accept help Areas where promoters seek active help

“The relationship had a lot to do with mindset change. A large part “Our PE partners helped us through our bad times via of the learnings was in areas like current situation of the market their guidance. Even while on the board, and our standing there.”—Promoter, PE-funded Indian firm it was very helpful.”—Promoter, PE-Funded Indian firm

Source: Bain-IVCA Private Equity Survey 2015 (n=39)

Page 36 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 2.23: Although about 80% of funds have a value creation plan for most portfolio companies, fewer than 50% are able to implement those plans and deliver results

Looking at your current portfolio companies, what is your view on the following statements?

Within first six months, Value creation plans get We do deep dives with We refresh the value We use internal team We use external support we have a robust implemented successfully management on key creation plans after about to help add value to help add value value creation plan and deliver results value levers (growth, cost) three years of ownership post-acquisition post-acquisition % of total funds 100%

0 Currently In 3–5 Currently In 3–5 Currently In 3–5 Currently In 3–5 Currently In 3–5 Currently In 3–5 years years years years years years <5% of portfolio 5%–25% of portfolio 25%–50% of portfolio 50%–80% of portfolio >80% of portfolio companies companies companies companies companies

Source: Bain-IVCA Private Equity Survey 2015 (n=39)

Figure 2.24: Funds are strengthening their portfolio teams and are enroling operating partners to accelerate value creation

Value creation mostly effected through portfolio teams and operating partners Most GPs intend to expand operating teams How many full-time equivalents do you have who focus exclusively on Who is mostly involved in working on the value addition portfolio company value addition? How do you plan to of your portfolio companies? expand the team in the next two to three years? % of total responses % of total responses 100% 100% Others Management consultants >10 people Expert advisers 80 80 5–10 people Ex-industry specialists

60 60 3–5 people Internal operating partners 40 40 2–3 people

20 20 Portfolio support teams 1 person

<1 person 0 0 Value addition of portfolio companies Current Target in next 2–3 years Source: Bain-IVCA Private Equity Survey 2015 (n=39)

Page 37 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 2.25: In 2014, the number of exits increased by 14% while the exit value decreased by 22%; exits expected to increase sharply in the next one to two years

PE and VC exits in India How do you expect the number of $8B annual exits to change compared with 2014?

100% 6.6 6.8 6.8 Increase significantly (>25%) 22% 6 5.3 80 Increase significantly (>25%) 4.1 Increase moderately 4 (10%–25%) 60

2 40

Decrease Increase moderately Increase slightly Increase slightly (10%–25%) slightly (0%–10%) (0%–10%) 20 (0%–10%) 0 2010 2011 2012 2013 2014 14% Number Decrease significantly Decrease significantly of exits 123 88 115 164 187 0 2015 Next 1–2 years Note: Only includes exits that were publicly reported Source: Bain India Private Equity exits database

Figure 2.26: In exits, share of public market sales increased sharply in 2014

Exit modes Top 2014 exits % of total exits Target Firms exiting Value ($M) Route 100% Buyback Hero MotoCorp* Bain Capital 400 Public (November 2014) market StanChart PE, Sutherland Global 300 Secondary 80 Services Oak Investment Partners Public Public Mahindra & Mahindra Goldman Sachs 278 market market Hero MotoCorp Public 60 sales Bain Capital 250 (including (June 2014) market IPOs) Kalaari Capital, IDG Ventures, Myntra Accel Partners, Tiger Global, 240 Strategic PremjiInvest, others 40 Public Secondary Idea Cellular Providence 234 market sale Galaxy Mercantiles IDFC PE 178 Secondary 20 and BlueRidge SEZ ChrysCapital 147 Secondary Strategic Intas Pharmaceuticals sale Public Mahindra & Mahindra Goldman Sachs 127 0 market 2009 2010 2011 2012 2013 2014 Petronet LN Asian Development Bank 117 Public *Public market trade of stake market Notes: Includes only those exits where exit mode is known; top exits, out of exits with available data; public market sale includes trade in public markets and IPOs Sources: Bain-IVCA Private Equity Survey 2015 (n=39); Bain PE exits database

Page 38 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 2.27: Strategic and secondary sales seen as common exit routes; IPO and strategic sale expected to be the most attractive routes in next one to three years

Which modes of exit do you expect to be most common in future years? % of total responses 80%

40 Next 1–3 years

20 2015

0 IPO Strategic sale Secondary salePromoter buyback

2015 Next 1–3 years Source: Bain-IVCA Private Equity Survey 2015 (n=39)

Figure 2.28: Pre-2008, vintage unexited deals continue to face challenges; however, funds feel that the environment is improving

Majority of funds are experiencing significant challenges with pre-2008 unexited deals; Most GPs plan to hold on to however, it is getting better with regard to last year pre-2008 investments Are you facing challenges with unexited deals bought pre-2008, What are your plans for unexited and how did that change compared to last year? deals with a pre-2008 vintage? % of total responses % of total responses % of total responses

100% 100% Worse 100% Exit at discount About the same 80 80 80 Significant challenges Work with 60 60 60 promoters for a buyback

40 40 Getting better 40 Moderate challenges Wait and 20 20 20 watch No real Getting challenges significantly better 0 0 0 Challenges with unexited Change in challenges Plans for unexited deals with pre-2008 vintage deals since last year a pre-2008 vintage Source: Bain-IVCA Private Equity Survey 2015 (n=39)

Page 39 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 2.29: Macroeconomic environment and potential IPO market turnaround could accelerate future exits; pressure to return capital is expected to continue to drive exits up

What do you think are the key drivers behind change in number of exits over 2014 (compared with 2013)? Which factors do you think will lead to change in the next two to three years? % of total responses 100% Obstacle to exit 80

40 Drive up exits 20

0 2014 In 2–3 2014 In 2–3 2014 In 2–3 2014 In 2–3 2014 In 2–3 2014 In 2–3 years years years years years years

Macroeconomic Change in Changes in capital Change in Higher corporate Pressure to exit and environment valuations market/IPO prominence of cash reserves/easier return invested (currency, inflation) environment secondary buyouts trade sales capital to LPs

“Valuations are high enough for people to consider exiting. It is a good time for exits with good IRR. Hence, the next two to three years are a good opportunity for exits.”—PE fund manager Source: Bain-IVCA Private Equity Survey 2015 (n=39)

Page 40 India Private Equity Report 2015 | Bain & Company, Inc.

Page 41

• The consumer technology sector includes companies focused on e-commerce, social connectivity, content generation & sharing, and wearable tech- 3. nology; it also includes the enabler companies which aid the operating models of others in the sector.

A focus on invest- • Increasing Internet penetration translates to rapid growth in online transactions. Comparing India ments in consumer with other developed economies reveals significant technology headroom for continued e-commerce growth. • As both working population and household incomes rise, India’s demand for technology-enabled services is expected to rise sharply. With companies adopting unique, country-specific business models, these services are already seeing rapid adoption.

• Consumer technology was the most attractive sector for PE/VCs in 2014, deal values and volumes grew by 137% and 71%, respectively, compared with 2010.

• The promise of high growth translated into investment in 2014, as $4.7 billion was invested into the sector.

• Average deal size in the sector was approximately $17 million, a threefold increase over 2013. More than 30% of funds expect deal sizes of >$50 million in coming years.

• Consumer technology-focused companies experienced a rapid rise in valuations in 2014. Nearly 70% of survey respondents expect valuations to continue to rise, despite perceiving them to be overvalued already.

• Both PEs and VCs compete to invest. While early-stage deals account for most of the investment to date, growth-stage deals increased significantly in 2014.

• Attractive valuations, fund network and sector expertise are the most critical factors that promoters consider when seeking PE funding.

• Funds expect strong growth in the next three to five years. They expect to increase their funding in 2015 and beyond. India Private Equity Report 2015 | Bain & Company, Inc.

Figure 3.1: Consumer technology space can be divided into five broad segments

Content Data Entertainment Productivity

Connectivity and Blogging and Social networks Classifieds Collaboration social microblogging

E-commerce E-tailingOnline travel Others

Smart access Wearable gadgets Health and fitness and devices (Glasses and watches)

-Logistics for App Enablers PaymentAdvertisement Platforms Analytics e-commerce developers

Note: Not exhaustive Segments for Indian companies

Figure 3.2: Internet penetration in India is expected to grow to 45% by 2020, with about 610 million people online

Online population (MM) CAGR: 16% 658 613 FY14

251 FY20 252

108

FY14 84 83 50 39 5 China US Brazil Indonesia Russia UK South Norway Korea Internet penetration 20% 45% 49% 79% 53% 33% 58% 77% 79% 87%

In about six years’ time, India will be where China is today

Notes: Q1 FY14 estimate; FY14-18 CAGR extrapolated to FY20 Sources: eMarketer; TRAI; Indiastat; Euromonitor

Page 44 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 3.3: Increasing Internet penetration is expected to spur rapid growth in online consumption

100%

Japan UK

US Germany 75

At 45% penetration (2020), South Korea nearly 50% of users, or 300 % of million Indians, are expected China Internet 50 to be buying online users who Russia buy Brazil online India (2013) 25 Mexico

Indonesia

0 0255075 100%

Internet penetration (2013)

Sources: Euromonitor, Bain analysis, eMarketer (FY14 estimate)

Figure 3.4: There is significant headroom for e-commerce growth in India compared with developed countries

E-commerce penetration in different markets (% of total sales for each category, 2012) Drugs and health market Beauty and personal care Media retail* 13.1

51 46 8.2 7.6 8.9 8.8 6.5 37 7.8 5.9 30 28 3.1 21 20 18 17 16 3.6 3.4 2.7 2.9 13 12 1.7 1.2 1.4 1.4 1.3 5 1.1 0.8 0.5 0.10.1 US US US UK UK UK India India Chile Chile India Chile Brazil China Russia Brazil Brazil China China Russia Poland Russia France France France Poland Poland Mexico Mexico Germany Germany Argentina Germany Argentina Colombia Colombia Argentina

Apparel Electronics Home appliances 17 22 16 16 22 20 13 20 13 12 10 17 16 9 14 13 12 9 8 8 7 6 9 8 5 55 4 4 2 1 1 1 1 0 2 2 1 1 US US US UK UK UK India India India Chile Chile Chile Brazil Brazil Brazil Russia China China China Russia Russia Poland France France Poland Poland France Mexico Mexico Mexico Germany Germany Germany Colombia Colombia Colombia Argentina Argentina Argentina *Media retail includes books, CDs, DVDs, etc. Sources: E-bit (Brazil); Euromonitor Developed countries Developing countries

Page 45 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 3.5: Rapidly rising working population with higher spending power is fuelling the demand for technology-enabled services

Working-age population as % of total is expected to grow from 44% in 2015 to 47% in 2025 Population of India by age group CAGR CAGR 2000– 2015– 1.5B 1.4 2015 2025 1.4 1.3 >60 years 3.4% 3.6% 1.2 1.1 40–59 years 2.8% 2.3% 1.0 1.0

25–39 years 2.1% 1.2%

0.5 15–24 years 1.2% 0.3%

<14 years 0.3% –0.1%

0.0 2000 2005 2010 2015E 2020F 2025F 39% 41% 43% 44% 46% 47% Fast increase in working-age population to result in increase in purchasing power Sources: Euromonitor; Bain analysis

Figure 3.6: In 2014, consumer technology emerged as the most attractive sector for PE and VC investments, with the most deals and highest deal value across sectors

Annual PE and VC investment value in consumer technology in India Annual PE and VC investment volume in consumer technology in India CAGR: 137% CAGR: 71%

300 $5B 4.7 280

237 4

200 182 3

2 97 100 1.2 1.0 1.0 1 33 0.1 0 0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014

Deal 2% 7% 10% 10% 31% Deal 10% 18% 33% 34% 35% value as volume as % of total % of total

Source: Bain India PE deals database

Page 46 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 3.7: Most funds expect growth to continue for the next two to three years, but funds also see potential challenges in high current valuations and average operations

Primary influencing factors of growth Potential challenges

“Whether the investments are good or not is still a question. Current rounds of funding are more like bridges to the next “E-commerce creates gross merchandise volume (GMV), capital raise. No one knows whether they will make money and other segments are around supporting or enabling. or not in the end.” In consumer technology, there is network effect, with many connections. Without having revenue, it is still very —Fund manager valuable business.”

—Fund manager “Valuations of many companies are overrated, as operationally, businesses are doing just OK right now.”

—Fund manager

“India needs to grow through one full Internet cycle of “More and more large funds are looking to invest about four to five years. More interesting companies from in consumer technology in India.” a buyout perspective will be those that will actually survive after that.” —Fund manager

—Fund manager

Source: Interviews with PE and VC managers

Figure 3.8: Investments in consumer technology quadrupled to $4.7 billion in 2014, with e-commerce and connectivity growing most

Annual PE and VC investments in Others CAGR consumer technology in India Content 11–14 $5B 68% 4.7 88% 40% Enablers –7% 4 Connectivity 70%

2 E-commerce 128% 1.2 1.0 1.0 1

0 2011 2012 2013 2014

Number of deals 97 182 237 280

Sources: Bain India PE deals database; interviews with PE and VC managers

Page 47 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 3.9: E-commerce, consumer technology enablers and wearables are likely to see significant investment over the next two years

Which consumer technology verticals are currently How is the attractiveness expected to attractive for PE and VC investments? change over the next two years?

Attractiveness: 5=very attractive and 1=very unattractive % of total respondents 5 100%

4.3 4.0 4 80

3.4 3.3

3 3.0 60

40 2

20 1

0 Enablers E-commerce Wearable ContentConnectivity 0 gadgets E-commerce Enablers Content Connectivity Wearable gadgets Decrease Decrease Remain Increase Increase Source: Bain-IVCA Private Equity Survey 2015 (n=39) significantly slightly broadly same slightly significantly

Figure 3.10: Average deal size for consumer technology tripled in 2014, mostly as a result of a few large deals

Average deal size increased by about 230% in 2014, primarily due to More than 30% of funds expect PE the increase in deals of more than $20 million activity of more than $50 million

Average deal size in consumer Deals by size as % of total technology in India 237 280 $20M CAGR: 228% 100% 100% >$50M >$500M $20–$50M $200–$500M 16.7 16.7 $10–$20M $100–$200M 80 80 $5–$10M 15 $50–$100M

60 60

40 40 $20–$50M <$5M 5.1 5.1 5 20 20

<$20M 0 0 0 2013 2014 2013 2014 Maximum activity expected in 2015 and beyond Sources: Bain-IVCA Private Equity Survey 2015 (n=39); Bain India PE deals database

Page 48 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 3.11: Funds believe consumer technology entrepreneurs consider valuations, the fund’s network and sector expertise to be the most important criteria for selecting a partner

In your opinion, what is the importance ascribed by consumer technology entrepreneurs to each of the following criteria in seeking PE funding? Average rating on a scale of 5, where 1=least important; 5=very important 5

0 Best valuationNetwork of the Sector expertiseTrack record in Referrals from Referrals from fund the industry other entrepreneurs bankers and lawyers Sources: Bain-IVCA Private Equity Survey 2015 (n=39); interviews with PE and VC managers

Figure 3.12: Valuations in consumer technology grew rapidly in 2014; most GPs perceive that consumer technology valuations are high and expect them to increase slightly

What is your appraisal of current How do you expect Flipkart valuation Snapdeal.com valuation valuations of potential targets in India? valuations to change? % of total responses % of total responses 2 $12B $2B 100% 100% 11 Increase significantly (>25%)

Very high 10 Increase moderately 80 80 (10%–25%) 2 8 7 60 60 1 6 1 High Increase slightly 40 (<10%) 0.7 40 4

1 2 20 20 2 Decrease slightly (<10%) Fair Decrease moderately Attractive (10%–25%) 0 0 0 0 April 14 July 14 Nov. 14 Jan. 14 April 14 Oct. 14 2014 Valuation expectation

“There is untapped potential for Internet access and goods and services that are not accessible in Tier-2 and Tier-3 cities. I would expect valuations in the short term to go up, as it is the demand and supply mismatch that is pushing up these levels.” —Founder, Lead Angels

Sources: Bain-IVCA Private Equity Survey 2015 (n=39); interviews with PE and VC managers

Page 49 India Private Equity Report 2015 | Bain & Company, Inc.

Figure 3.13: Given positive forecasts for 2015 growth, the investment outlook for consumer technology in the medium term is strong and positive

Funds expect growth of more than 25%; plan to increase funding in 2015 and beyond

Remain stable 100% 100% 100–200M Slight growth (0%–10%) 50–100M

80 80 Moderate growth (10%–25%)

20–50M 60 60

40 40

Strong growth (>25%)

20 20 <20M

0 0 Growth expectation in 3–5 years 2014 2015 and beyond Sources: Bain-IVCA Private Equity Survey 2015 (n=39); interviews with PE and VC managers

Page 50 India Private Equity Report 2015 | Bain & Company, Inc.

Page 51

• GPs should focus on building a strong team with the right credentials to attract investors and promoters. Strong operational expertise is the key to 4. success in an extremely competitive environment.

• India stands on the brink of a major growth Implications revival, and with it comes a big investment opportunity. However, with the competition amongst firms, LPs must carefully scrutinise the firms they are considering.

• Entrepreneurs should view PE as not only a source of funding but also an opportunity for learning and adopting best practices. Rather than focusing solely on valuations, entrepreneurs should consider partnering with a fund with the right expertise.

• The new government has set high expectations amongst investors with its pro-business speak. Policy makers should look to ensure that these words translate into action, as this is critical to maintaining investor confidence. PE can be pivotal in setting India on its desired growth trajectory. India Private Equity Report 2015 | Bain & Company, Inc.

Implications

Overall, 2014 was a year of growth for PE in India, as deal activity, deal value and deal volumes all increased throughout the year. Both fund-raising and deal making moved in a positive direction, and this trajectory is expected to continue in coming years. Consumer technology turned out to be the most attractive sector for PE and VC in 2014. Funds are sharpening their focus on early- and growth-stage deals, with continued emphasis on improving operating teams to focus on value creation as a differentiator. The change of government led to a revival of investor confidence. Funds are optimistic that this will spur a series of new initiatives and policies and pro- mote further investment across multiple sectors.

General Partners

First, GPs need to focus on building a strong team; this is critical not only to successful fund-raising but also to building a brand that promoters want to associate themselves with. Second, doubling down on efforts to build a strong relationship with the promoter management will be advantageous in securing deals at the right valuation, which is of great importance to promoters. Third, there are attractive deals in the consumer technology sector. GPs should explore the opportunity to invest here, as exit activity is expected only to rise in coming years. GPs should look to build a strong network and sector expertise to ride this wave. Lastly, with multiple funds looking to improve their operating teams, a solid value creation and implementation plan is likely to emerge as a strong differentiator for tapping quality deals.

Indian entrepreneurs

GPs point out that a growing number of Indian entrepreneurs have come to understand the value that PE funding brings, there are multiple success stories of firms establishing themselves with the help of PE funding. In such a scenario, recognizing the fact that PE is an activist capital opens up a multitude of opportunities for entrepreneurs, and they should look to leverage the expertise of PE and VC partners, including learning and adopting best practices in financing, expansion and customer access. Entrepreneurs should also look to leverage the firm’s brand in the marketplace in order to recruit senior executives and build a strong network. Another important consideration is the fact that investors come in with a set exit time frame, and promoters should actively align with this roadmap in the early stages of the relationship.

Limited Partners

The Indian market is expected to be on the verge of a strong revival. It’s important for LPs to understand this opportunity. However, while committing capital to India, they must fully understand the risks and opportunities in order to set realistic expectations. With rising competition amongst firms, promoters have the luxury of being more selective while choosing their investment partner, according importance to the investment team and their past track record. Valuations are not the sole consideration any longer. In such a scenario, LPs should be selective about the GPs they choose to work with by investing adequate time in the process.

Public policy makers

Foreign capital, of which PE accounts for more than 50%, has played a pivotal role to date in fuelling India’s growth aspirations. India’s new government has set ambitious targets for economic growth that require a great deal of capital across multiple sectors—including infrastructure, telecom and healthcare. Investors have displayed high confidence in the functioning of this new government given its pro-business plans, and they have high

Page 54 India Private Equity Report 2015 | Bain & Company, Inc.

expectations as a result. Against such a backdrop, policy makers need to continue to frame more business-friendly policies and ensure that these come to pass. PE has a strong capability to bring in expertise and guidance for Indian entrepreneurs while simultaneously shouldering risk. Reshaping the regulatory frameworks around private investment in key sectors can help create an environment that’s conducive to private investment to help put India on the growth trajectory the government envisions. Apart from this, policy makers should also consider opening up additional avenues for domestic investment to fund this growth story. This will only make it easier for new businesses to flourish.

Despite legacy issues in the Indian PE market, including exit overhang and currency fluctuations among others, 2014 was a boom year for the country. Funds expect that coming years hold even more promise with even better prospects for investments in India, and we believe that PE and VC investors should continue to be excited about it. It is important that all the stakeholders work together to create a healthy landscape, as India seems poised to move ahead and unlock its true potential.

Page 55 India Private Equity Report 2015 | Bain & Company, Inc.

About Bain & Company’s Private Equity business

Bain & Company is the management consulting firm the world’s business leaders come to when they want en- during results. Together, we find value across boundaries, develop insights to act on and energize teams to sustain success. We’re passionate about always doing the right thing for our clients, our people and our communities, even if it isn’t easy. Bain advises clients on strategy, operations, technology, organisation, private equity and mergers and acquisitions. We develop practical, customised insights that clients act on and transfer skills that make change stick. Founded in 1973, Bain has 51 offices in 33 countries, and our deep expertise and client roster cross every industry and economic sector. Our clients have outperformed the stock market 4 to 1.

Bain is also the leading consulting partner to the private equity (PE) industry and its stakeholders. Private equity consulting at Bain has grown 13-fold over the past 15 years and now represents about one-quarter of the firm’s global business. We maintain a global network of more than 1,000 experienced professionals serving PE clients. In India, we have a leadership position in PE consulting and have reviewed a majority of the large PE deals that have come to the market. Our practice is more than triple the size of the next-largest consulting firm serving private equity firms both globally and within India.

Bain’s work with PE firms spans fund types, including buyout, infrastructure, real estate and debt. We also work with hedge funds, as well as with many of the most prominent institutional investors, including sovereign wealth funds, pension funds, endowments and family investment offices. We support our clients across a broad range of objectives:

Deal generation: We help develop differentiated investment theses and enhance deal flow, profiling industries, screening companies and devising a plan to approach targets.

Due diligence: We help support better deal decisions by performing due diligence, assessing performance improvement opportunities and providing a post-acquisition agenda.

Immediate post-acquisition: We support the pursuit of rapid returns by developing a strategic blueprint for the acquired company, leading workshops that align management with strategic priorities and directing focused initiatives.

Ongoing value addition: We help increase a company’s value by supporting revenue enhancement and cost reduction and by refreshing strategy.

Exit: We help ensure funds maximise returns by identifying the optimal exit strategy, preparing the selling doc- uments and prequalifying buyers.

Firm strategy and operations: We help PE firms develop their own strategy for continued excellence by devising differentiated strategies, maximising investment capabilities, developing sector specialisation and intelligence, enhancing fund-raising, improving organisational design and decision making, and enlisting top talent.

Institutional investor strategy: We help institutional investors develop best-in-class investment programmes across asset classes, including PE, infrastructure and real estate. Topics we address cover asset-class allocation, portfolio construction and manager selection, governance and risk management, and organisational design and decision making. We also help institutional investors expand participation in PE, including through co-investment and direct investing opportunities.

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About Indian Private Equity and Venture Capital Association

Indian Private Equity and Venture Capital Association (IVCA) is the oldest, most influential and largest member- based national organisation of its kind. It represents venture capital (VC) and private equity (PE) firms with the aim of promoting the industry in India. It seeks to create a more favourable environment for private equity investments and entrepreneurship. It is an influential forum, representing the industry to governmental bodies and public authorities.

IVCA members include leading VC and PE firms, institutional investors, banks, corporate advisers, accountants, lawyers and other service providers. These firms provide capital for seed ventures, early-stage companies, later- stage expansion and growth financing for management buyouts and buy-ins.

IVCA’s purpose is to support the examination and discussion of management and investment issues in PE and VC in India. It aims to support entrepreneurial activity and innovation, as well as the development and mainte- nance of a PE and VC industry that provides long-term equity financing. It helps establish high standards of ethics, business conduct and professional competence. IVCA also serves as a powerful platform for investment funds to interact with one another.

IVCA stimulates the promotion, research and analysis of PE and VC in India, and facilitates contact with policy makers, research institutions, universities, trade associations and other relevant organisations.

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Page 59 India Private Equity Report 2015 | Bain & Company, Inc.

Page 60 Key contacts in Bain’s Global Private Equity practice

Global: Hugh MacArthur ([email protected])

Americas: Bill Halloran ([email protected])

Asia-Pacific: Suvir Varma ([email protected])

EMEA: Graham Elton ([email protected])

India: Sri Rajan ([email protected]) Arpan Sheth ([email protected])

Please direct questions and comments about this report via email to: [email protected]. Bain & Company India Pvt. Ltd.

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Bain & Company is the management consulting firm that the world’s business leaders come to when they want results.

Bain advises clients on strategy, operations, technology, organisation, private equity and mergers and acquisitions. We develop practical, customised insights that clients act on and transfer skills that make change stick. Founded in 1973, Bain has 51 offices in 33 countries, and our deep expertise and client roster cross every industry and economic sector. Our clients have outperformed the stock market 4 to 1.

For more information, visit www.bain.com